COVID-19 is affecting businesses globally. However, its impact on the broad-based black economic empowerment (BEE) status of a business is an effect which is unique to South Africa.
Here are 10 things to know about the potential effects of COVID-19 on BEE and your business:
1. BEE verifications can still be conducted
The South African National Accreditation System (SANAS) issued a notice giving verification agents guidance on how to continue to conduct their BEE verifications without having to perform an onsite visit. The notice was issued before the national lockdown was announced, so the guidance only contemplates restricted movement and access to documents as opposed to no movement being allowed. Since the lockdown will continue until at least 30 April 2020, it is expected that SANAS will issue an updated notice.
2. Recorded communication and interviews in terms of SANAS notice
The SANAS notice allows for documents to be viewed and interviews to be conducted electronically through video conferencing forums – however these video sessions must be recorded and kept on file by the verification agent. If there is a concern regarding the confidential or sensitive nature of the shared information, we recommend that the communication starts with a statement that neither confidentiality nor privilege is waived through the disclosure of information.
3. Effect of COVID-19 on annual turnover
A business must consider whether COVID-19 will impact its annual turnover to such an extent that its qualification as an exempted micro enterprise (having an annual turnover of less than R10 million), a qualifying small enterprise (having an annual turnover of between R10 million and R50 million), or a large enterprise (having an annual turnover of more than R50 million) is affected. This is a particularly important analysis for entities that have an annual turnover close to any of these thresholds because this:
- would ensure that they are measured in terms of the appropriate regulatory framework; and
- may allow them access to BEE advantages that may not otherwise have been available to them.
4. Engagements with BEE shareholders
It is recommended that any forecasts regarding what shareholders may expect to receive as distributions are updated and any changes in values are communicated to BEE shareholders, especially where the BEE shareholders are employees. This exercise:
- manages expectations regarding distribution values;
- constitutes written evidence to your verification agent of the analyses and communication should any queries arise in respect of the economic interest aspects of the ownership scorecard; and
- mitigates the risk that any concerns or allegations of fronting and misconduct are raised due to a misunderstanding or miscommunication.
5. Net value considerations
The net value calculations take into account the value of the BEE shareholders’ shares and the value of the debt incurred by the BEE shareholders to acquire the shares (acquisition debt). Generally, the net value calculations are a means to ensure that the acquisition debt is decreased in sufficient proportions over time and value is transferred to the BEE shareholders. However, if COVID-19 impacts the value of the business and its shares, the proportion that the acquisition debt should decrease will not be in the proportions required. As net value is the priority element of the ownership scorecard, should a business not achieve at least 40% of the points allocated to net value (which is 3.2 points) the business would lose BEE points and also have its BEE level discounted by one level.
6. COVID-19’s impact on net profit after tax (NPAT) based targets
Many targets on the BEE scorecard are based on the business’ NPAT – namely the enterprise development spend target, the supplier development spend target, and the socio-economic development spend target. The initiatives used to achieve the spend target are based on NPAT forecasts with the actual initiatives being implemented during the course of the measurement period. If COVID-19 decreases NPAT, businesses must review their initial forecasts and reconsider their planned initiatives to ensure that they do not over commit to initiatives and do not over spend to achieve their required points.
7. Implementation of skills development initiatives
The periods of restricted movement and lockdown present a unique opportunity. Employers can require that their employees complete the various skills development initiatives (those that can be done online) during the lockdown period whilst they have the time available.
8. Master’s Office and Companies and Intellectual Property Commission (CIPC)
COVID-19 has resulted in the temporary shutdown of many regulators, including the Master’s Office and the CIPC. It is anticipated that when they re-open there will be a backlog of applications and therefore a delay in the regulators’ processing applications.
These periods will:
- in respect of trusts, impact the registration of new trusts, changes of trustees (by the update of letters of authority) and the amendment of trust deeds; and
- in relation to companies, impact the creation of new companies, and the amendment of memoranda of incorporation (which would include the creation of new share classes).
These shutdowns can delay the implementation of new BEE ownership transactions, but also prevent existing BEE shareholders being compliant with their obligations if they cannot take required administrative actions.
9. Suspension of BEE
Whilst it is possible that certain leniencies may be introduced to cater for the effect of COVID-19 on BEE initiatives, it is unlikely that BEE will be suspended as a whole or suspended indefinitely because of COVID-19. Therefore South African businesses must still conduct themselves in accordance with their BEE policies or BEE plans, but these policies or plans must be updated to take into account the impact of COVID-19.
10. Consequences of not re-assessing your BEE obligations in light of COVID-19
The risk of not considering the impact of COVID-19 on your BEE status is that the business could breach contractual obligations, incur penalties, have contracts terminated, have to deal with fronting or misconduct concerns or allegations, and therefore suffer possible reputational damage. The exact business risk would depend on what steps the business has or has not taken. Therefore a full BEE analysis should be done in relation to the effects of COVID-19 on the business.